An income tax cut might not be good news for everyone…

Last year, whilst reversing several other announcements from the Truss/Kwarteng ‘mini-budget’, Jeremy Hunt announced that the basic rate of income tax would remain at 20% until ‘economic conditions allow for it to be cut and a change is affordable’. Despite a rising tax take for the Treasury, the chancellor has recently talked down the likelihood of income tax cuts in the short term, indicating that there is not enough room in the budget and suggesting that such cuts may be counter-productive to his aim of bringing down inflation. 

As we approach the Autumn Statement, renewed calls are being made for the chancellor to stop the ‘stealth tax’ caused by frozen tax bands and allowances. 

Individuals who reside in England, Wales and Northern Ireland currently incur the higher rate of income tax on taxable income in excess of £50,270, whilst those residing in Scotland incur the Scottish higher rate of tax, set by the Scottish government, on taxable income in excess of £43,662. 

The main UK income tax bands and allowances have been frozen since 6 April 2021 and, are set to remain frozen until April 2028. Wage inflation experienced since then, has resulted in an increased tax burden on individuals, with many being dragged into the higher rate of income tax bracket than previously.

A separate issue is the high-income child benefit charge, which arises when an individual has adjusted net income in excess of £50,000. The threshold for this charge has not changed in over a decade, during which the purchasing power of £50,000 has significantly declined.

Changes to income tax allowances, rates or bands are usually not affected until at least the following tax year. Therefore, despite the chancellor’s apparent opposition to ‘short term’ tax cuts, we could still potentially see changes announced to come into effect on 6 April 2024 or 6 April 2025. 

If the chancellor does bend to pressure and extend the basic rate income tax threshold, this will most likely be mirrored by an adjustment to the National Insurance contributions (NICs) thresholds, which have been aligned with main UK income tax thresholds for all taxpayers since the start of this tax year. This would mean that the tax savings, which would only be felt by those earning over £50,270, may not be as significant as they may first seem for employees and the self-employed. The 20% income tax saving would likely be reduced by an increased NICs burden of 10% (for employees) or 7% (for the self-employed). Individuals with income sources which are not subject to NICs, such as savers and most landlords, would see a bigger saving.

Individuals who reside in Scotland are subject to different income tax rates and thresholds to those in the rest of the UK, whilst being subject to the same NICs thresholds. Currently, this causes an abnormally high marginal tax rate for Scottish resident employees earning between £43,662 and £50,270, who will suffer both the Scottish higher rate of income tax (42%), as well as the primary rate of Class 1 (employee) NICs (12%) or Class 4 (self-employed) NICs (9%). As a result, Scottish resident employees and self-employed individuals pay more than 50% in direct taxes on earned income in this bracket. 

Whilst an increase to the UK main basic rate income tax band will provide a tax cut for higher earners in the rest of the UK, an equivalent increase in the primary NICs threshold would increase the amount of income subject to the high combined marginal tax rate for Scottish residents. Whilst the Scottish government would have time to react prior to the implementation of this change, (Scottish tax and spending plans will be announced on 19 December 2023) this may create a boiling point for the interaction of NICs and the partially devolved Scottish income tax.